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									Viet Nam

The economy is weathering the global economic crisis relatively well due largely to swift and strong
policy responses. The GDP growth forecast for 2009 is revised up from that made in March and the 2010
forecast is maintained, with growth expected to accelerate in the second half of 2009 and into 2010. The
projections for inflation are raised, chiefly because of higher world commodity prices. Forecasts for current
account deficits are narrowed, though the overall balance of payments is still expected to be in deficit this
year, before it returns to surplus next year. Therefore, the Government needs to strike a balance between
stimulating growth through demand-side measures and safeguarding macroeconomic stability.

Updated assessment
Despite the weak external environment, the economy has continued
expanding this year, albeit at a slower rate. GDP grew by 3.9% in the first
half of 2009, as against 6.2% in 2008 and more than 8% in 2005–2007
                                                                                3.10.1 GDP growth by sector
(Figure 3.10.1). Expansionary fiscal and monetary policies boosted public            GDP         Agriculture       Industry        Services
consumption and domestically financed investment. Imports fell more                                                                      %
steeply than exports, so that net exports contributed to GDP growth. At the                                                              12

same time, a rise in unemployment and fall in remittance inflows damped                                                                   9

growth of private consumption, and a downturn in inflows of foreign direct                                                                6
investment (FDI) caused a decline in foreign-financed investment.                                                                         3
    Viet Nam’s economic slowdown appears to have bottomed out early                                                                       0
in 2009, with year-on-year GDP growth quickening to an estimated 4.5%                2005        06          07         08     H1 09
in the second quarter from 3.1% in the first. Growth of agriculture pulled      Source: General Statistics Office of Viet Nam.
                                                                                Click here for figure data
back sharply in the first quarter because of bad weather, but rebounded
in the second quarter, aided by a bountiful winter–spring rice harvest.
Manufacturing, which contracted in the first quarter on account of weak
external demand, started growing again in the second, as expansionary
monetary and fiscal policies strengthened domestic demand. Growth of
services and construction accelerated in the second quarter owing to a
pickup in private consumption and domestically financed investment.             3.10.2 Crude oil output Crude oil output
    Following several years of decline, output of crude oil grew by 17.9% in                                             Million metric tons
the first half of 2009 (Figure 3.10.2). Falling output at some old fields was
more than offset by increases at new fields.                                                                                             15

    A softening in the labor market that started in late 2008 continued                                                                  10

in early 2009, as economic activity slowed and businesses shed labor.                                                                    5
Although most layoffs occurred in urban areas, unemployment and                                                                          0
underemployment increased in both urban and rural areas, as some of                  2005 06        07      08          H1 08 H1 09
                                                                                Source: General Statistics Office of Viet Nam.
those from villages who had lost their jobs in cities returned home. Declines   Click here for figure data
in remittance receipts and wages pushed some households into poverty.
Toward mid-2009, however, demand for labor appeared to pick up again.
    Inflation has decelerated sharply owing to lower world commodity
prices and relatively slow domestic economic growth. Period-average

This chapter was written by Bahodir Ganiev of the Viet Nam Resident Mission,
ADB, Hanoi.
162 Asian Development Outlook 2009 Update

inflation eased to 8.3% in January–August 2009 from 23.0% in 2008. Year-        3.10.3 Inflation
on-year inflation fell to 2.0% in August 2009 from 28.3% in August 2008               Period-averagea inflation
                                                                                      Year-on-year inflation
(Figure 3.10.3). However, inflation pressures reemerged in the second quarter                    Seasonally adjusted monthly inflation
as commodity prices edged up and growth accelerated. Seasonally adjusted        %                                                          %
month-on-month inflation rose to 0.8% in the June–July period, a fairly         30                                                         6

high rate given that world commodity prices were well below their peaks.        20                                                         4

     To stimulate economic activity and limit the rise in unemployment,          10                                                        2
the State Bank of Viet Nam (SBV), the central bank, eased monetary                0                                                        0
policy significantly in late 2008 and early 2009 and has kept it relatively     -10                                                        -2
loose since then. Year-on-year growth of reserve money quickened from                  Jan    Apr Jul         Oct Jan        Apr Jul
                                                                                       2008                           09
13.7% in the third quarter of 2008 to 26.7% in the first quarter of 2009,       a Year-to-date average.
before a decline in SBV’s foreign assets pulled it back to 21.2% in the         Sources: General Statistics Office of Viet Nam; staff
second quarter (Figure 3.10.4). Spurred by the introduction of government       estimates.
                                                                                Click here for figure data
interest rate subsidies, growth of credit and money supply accelerated in
the first half of 2009; in particular, growth of total liquidity (M2) stepped
up to 35.8% in the second quarter from 20.3% in the fourth quarter of 2008.
     Since the easing of monetary policy was not enough to prevent a sharp
slowdown in growth, the Government approved several fiscal stimulus
measures in the first half of 2009 (Box 3.10.1). They include a temporary
30% cut in the corporate tax rate for small and medium-sized enterprises,
additional financial assistance to poor households, a 4 percentage point        3.10.4 Growth of money and banking
interest rate subsidy on certain bank loans, and a boost in planned             indicators
                                                                                      Total liquidity (M2)
infrastructure spending. The total cost of these measures is estimated at             Reserve money
D145.6 trillion, more than was expected when Asian Development Outlook                Banking system net domestic credit
2009 (ADO 2009) was launched in March this year.                                                                                           %
     The tax breaks, coupled with a fall in oil income caused by lower
world oil prices, reduced budget revenue and grants in the first half of
2009 (Figure 3.10.5). Budget expenditure decreased as well, because the
fiscal stimulus mainly increased off-budget spending and lending. The                                                                      20

budget fell into deficit, from a surplus a year earlier. The overall fiscal                                                                0
                                                                                     Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
deficit (including off-budget expenditure and lending) was likely much               2007                 08                   09
larger than the budget deficit.                                                 Sources: State Bank of Viet Nam; staff estimates.
     SBV has kept its reference foreign-exchange rate fairly stable since       Click here for figure data

December 2008 (Figure 3.10.6). Declines in exports as well as in remittance
and foreign capital inflows have reduced the supply of foreign exchange,
while expansionary monetary and fiscal policies have increased demand
for it. Consequently, there has been a shortage of foreign exchange in the
formal market and the dong’s exchange rate against the US dollar has            3.10.5 Government finance
remained at the upper bound of its trading band since October 2008.                   Budget revenue and grantsa
                                                                                      Budget expenditureb
The band was widened to +/-5% from +/-3% around SBV’s reference rate                                                                % of GDP
in March 2009, resulting in depreciation against the US dollar by about                                                                   35

2% in the formal market. However, this depreciation was insufficient for                                                                   28

the market to clear. The black market exchange rate has stayed above the                                                                   21

upper bound of the trading band most of the time since October 2008.                                                                       14

     The shortage of foreign exchange in the formal market has helped                                                                      7

narrow the trade deficit by suppressing imports. But it has also created                                                                   0
                                                                                     2005 06         07     08          H1 08 H1 09
difficulties for businesses, given rise to indirect payments for foreign        a Excludes revenue carried over from the previous year.
exchange in the formal market, and hurt the business environment.               b Excludes amortization of public debt and expenditure
                                                                                brought forward from the following year.
Furthermore, the shortage has fueled expectations of devaluation and            Sources: Ministry of Finance and General Statistics Office of
put depreciation pressure on the dong in the black market. The spread           Viet Nam; staff estimates.
between SBV’s reference rate and the black market rate widened to more          Click here for figure data
Southeast Asia                                                                                                                          Viet Nam 163

 3.10.1 Fiscal stimulus measures and the 2009 budget

 The Government approved various fiscal stimulus measures                      to 2010 and the bringing forward of some expenditure from
 in January–May 2009 to ease the impact on the economy                         2010 to 2009.
 of the global economic slump. Given the consensus-based                           In June 2009, the National Assembly lowered the official
 decision making system, it approved policies in a piecemeal                   GDP growth target for 2009 from 6.5% to 5.0% and raised
 fashion to speed their implementation, rather than wait to                    the ceiling on the budget deficit (based on the Government’s
 get agreement on a package of measures.                                       definition) from 4.8% of GDP to 7.0% of GDP (Box table
     This approach enabled the Government to start carrying                    2). This in effect increased the planned overall fiscal deficit
 out some stimulus measures as early as February. However,                     (including net off-budget expenditure and lending) from
 it also created some uncertainty about the impact of                          6.9% to 15.7% of GDP. However, the Government’s revised
 the stimulus on the budget, and the total amount raised                       budget plan is based on conservative projections of world oil
 questions about the implications for macroeconomic                            prices and revenue performance. Actual revenue is likely to
 stability and sustainability of public debt.                                  exceed the planned amount owing to higher world oil prices
     The total amount is indeed large, estimated at                            and improved tax administration.
 D145.6 trillion, or 8.7% of projected 2009 GDP
 (Box table 1). However, the direct impact on the 2009                          2 Budget, % of GDP, 2009
 budget will be less than this amount, even if all measures                                                             Government’s plan           ADB
 are fully carried out. This is because the measures include                                                                                      revised
                                                                                                                        Original    Revised
 housing assistance to the poor that will be mostly financed                                                                                    projections
 by the Viet Nam Bank for Social Policies and interest rate                     Budget revenue and grants                  21.5        20.0          22.8
 subsidies that will be partly disbursed in 2010.                               Budget expenditure                         25.2        27.2          27.6
                                                                                Budget fiscal balance                      -4.8         -7.0         -4.5
                                                                                 (Government's definition)a
  1 Fiscal stimulus measures, trillion dong, 2009                               Off-budget expenditure and                  3.2         8.5           5.3
                                        Amounta Potential direct impact          lending (net)
                                                    on the budgetb              Overall fiscal balanceb                    -6.9       -15.7          -10.1
                                                  2009          2010            ADB = Asian Development Bank.
                                                                                a Includes carried over 2008 revenue (as revenue) and amortization of public
  Measures affecting                      28.0     -28.0          9.2
    government revenue                                                          debt (as expenditure). b Excludes carried over 2008 revenue and amortization
  Measures affecting government            117.6      114.5          -24.7      of public debt but includes net off-budget expenditure and lending.
    expenditure and net lending                                                 Source: Government of Viet Nam; staff estimates.
  Total                                   145.6      -141.5          33.9
  Billion US dollars                        8.6        -8.3           1.8         In addition, planned capital spending is unlikely to
  % of GDP                                  8.7        -8.5           1.8      be fully disbursed due to implementation and financing
  a Excludes quasi-fiscal stimulus measures undertaken through the Viet Nam
                                                                               constraints. Accordingly, the ADO 2009 forecast of the
  Development Bank (such as guaranteeing bank loans to small and medium-       overall fiscal deficit in 2009 is revised up only slightly,
  sized enterprises). b Staff estimates based on the assumption that the
  announced fiscal stimulus measures will be fully implemented. Excludes       from 9.8% of GDP to 10.1% of GDP. The gap is expected
  the indirect impact of the measures on the budget through their effects on   to be financed mainly by drawdowns on the Government’s
  public debt, growth, etc.                                                    deposits at SBV and at commercial banks, and by borrowing
  Source: Government of Viet Nam; staff estimates.                             from multilateral and bilateral development agencies.
                                                                                  The fiscal deficit is therefore unlikely to put sustainability
   The potential direct impact of the measures on the 2010                     of public debt at risk. Nor is it expected to jeopardize
 budget is positive, given that they include both deferment of                 macroeconomic stability, assuming that SBV starts
 some tax payments and budget loan repayments from 2009                        tightening monetary policy toward the end of 2009.

than 9% in mid-July 2009 from about 3% at end-2008. SBV increased the
supply of foreign exchange in the formal market in July, which cut the
spread to about 8% in August.
     Weak external demand reduced merchandise exports by 10.2% in
the first half of 2009 (Figure 3.10.7). Exports of seafood, coffee, crude
oil, and wood products, for example, fell by more than 10%. This drop
was partly offset by reexports of gold (about 9% of total exports) and an
increase in exports of rice. Imports dropped at the much faster rate of
164 Asian Development Outlook 2009 Update

34.1%, reflecting the slowdown of economic activity, lower import prices,
                                                                                    3.10.6 Exchange rates
reduced availability of trade credit, and the shortage of foreign exchange.               Black market exchange rate
A downturn in FDI inflows contributed to the sharp decline in imports                     Lower bound of the trading band
of capital goods. The trade deficit (balance-of-payments basis) narrowed                  Upper bound of the trading band
                                                                                          Reference rate of the State Bank of Viet Nam
to $0.2 billion in January–June 2009 from $11.4 billion in the same period                                                                 Dong/$
of the previous year. Despite declines in remittance inflows and tourism                                                                    20,000

income, the current account recorded a surplus of 0.4% of GDP in the                                                                        19,000
first half of 2009, compared with a deficit of 23.8% in the same period of
2008 (Figure 3.10.8). (The first-half current account balance would be a
deficit of 5.7% of GDP if reexports of gold were excluded.)                                                                                 15,000
     The capital account balance turned from surplus into deficit due to a            Jan Apr Jul           Oct Jan Apr Jul
                                                                                      2008                        09
downturn in FDI inflows and outflows of portfolio investment and short-             Sources: State Bank of Viet Nam; staff observations.
term capital. The overall balance of payments recorded a deficit, and gross         Click here for figure data
official reserves fell to $17.6 billion at end-June 2009 from $23.0 billion at
end-2008. In terms of import coverage, however, gross official reserves
increased to 16.4 weeks of imports at end-June 2009.
     For the rest of 2009, it is assumed that the Government will not
take additional fiscal stimulus measures. It is further assumed that SBV
will start tightening monetary policy toward the end of this year, as the
balance of risks shifts from growth to macroeconomic stability. Output at
new oil fields that came on stream in late 2008 is now expected to reach
                                                                                    3.10.7 Trade indicators
its peak in 2009, rather than in 2010. Hence, total oil output is projected              Export growth
to rise to 16.5 million metric tons in 2009, revised up from March.                      Import growth                        Trade balance
     Based on these assumptions, the GDP growth forecast for 2009 is raised         %, year on year
                                                                                                                                        $ billion
to 4.7% from 4.5% in ADO 2009, mainly a result of the larger than expected           60                                                          8
fiscal stimulus, oil output, and net exports. Growth in the second half is           30                                                          4
forecast to accelerate to 5.4%. Inflation in 2009 is now seen averaging 6.8%,         0                                                          0
above that predicted in March because of stronger than expected inflation           -30                                                          -4
inertia as well as higher projections of global commodity prices. The current       -60                                                          -8
                                                                                            Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
account will return to deficit in the second half as exports shrink further                 2007        08          09
and imports pick up. For all 2009, the deficit is likely to be 7.0% of GDP,         Sources: State Bank of Viet Nam; staff estimates.
revised from 11.5% in view of larger exports of oil and rice, gold reexports,       Click here for figure data
the sharper decline in imports, and larger GDP than projected in ADO 2009.
The overall balance of payments is still expected to record a deficit this year.

Forecasts of 2010’s outcomes are based on the assumption that the                   3.10.8 Current account and reserves
Government will not adopt additional fiscal stimulus measures next year                   Current account balance
and that SBV will pursue moderately tight monetary policy. It is further                  Gross official reserves
                                                                                                                                           $ billion
assumed that SBV will eliminate the shortage of foreign exchange through                                                                         26
greater flexibility of its reference rate, tighter monetary policy, and increased
sales of foreign exchange. The projection for oil production in 2010 is                                                                         13

maintained at 15.5 million metric tons, an easing from this year’s level.                                                                       0
    On this basis, GDP growth is forecast to increase to 6.5% in 2010
(Figure 3.10.9), in line with the ADO 2009 projection. Growth of                          2005    06     07      08        H1 08 H1 09

consumption and domestically financed investment will speed up as                   Note: Reserves exclude the Government’s foreign exchange
the 2009 monetary and fiscal stimuli work through the economy. The                  deposits at the State Bank of Viet Nam and the foreign
                                                                                    exchange counterpart of swap operations.
anticipated improvement of global financial conditions will bring about             Sources: State Bank of Viet Nam; staff estimates.
an upturn in foreign-financed investment. At the same time, net exports             Click here for figure data
of goods and services will fall, with imports growing faster than exports.
Southeast Asia                                                                                                        Viet Nam 165

    The labor market will pick up on the back of accelerating growth, and       3.10.1 Selected economic indicators (%)
incomes will increase. Inflation is now forecast at 8.5% next year, revised                                2009       2010
up from 5.0%. The reason is the rapid growth of money supply in 2009                                    ADO Update ADO Update
and expected increases in world commodity prices.                                                       2009       2009
    The overall fiscal deficit is likely to narrow to about 4.5% of GDP         GDP growth                 4.5        4.7    6.5      6.5
next year (Figure 3.10.10). The forecast rise in world oil prices (hence oil    Inflation                  4.0        6.8    5.0      8.5
revenue), faster economic growth, and deferral of some tax payments             Current acct. bal. -11.5              -7.0   -9.7     -9.0
from 2009 to 2010 as part of the fiscal stimulus will boost government           (share of GDP)
receipts. Expenditure will fall because some outlays initially planned          Source: Staff estimates.
for 2010 are being brought forward to 2009 (also part of the 2009 fiscal
stimulus), and no additional fiscal pump priming is expected next year.
    Viet Nam’s stock of public and publicly guaranteed debt is likely          3.10.9 Growth and inflation
to be slightly higher than was forecast in March, at about 46% of GDP               GDP                                        Inflation
in 2010, compared with 48% in 2009 and an estimated 44% in 2008                %                                                            %
                                                                               10                                                           25
(Figure 3.10.11). Since much of the debt is on concessional terms, its          8                                                           20
present value will remain below 20% of GDP.                                     6                                                           15
    The current account deficit is forecast to widen from 7.0% of GDP           4                                                           10
this year to 9.0% in 2010. Stronger external demand and higher prices           2                                                           5
for goods shipped abroad will lift exports, and remittance inflows will         0                                                           0
                                                                                      2005      06      07        08  09       10
increase as economies in source countries improve. However, these factors                                              Forecast
will be more than offset by increases in imports resulting from stronger       Sources: Asian Development Outlook database; staff
economic growth, improved availability of trade credit and foreign             estimates.
                                                                               Click here for figure data
exchange, and higher import prices. The overall balance of payments
should return to surplus if capital inflows rebound as anticipated.
    Risks to this outlook are mainly on the downside. A weaker than            3.10.10 Fiscal and current account deficits
expected global economic recovery would damp growth in Viet Nam,                    Current account          Fiscal
and an unexpected spurt in world commodity prices would mean                                                                        % of GDP
higher inflation. A conceivable domestic risk is that inflation pressures                                                                 5

and expectations of devaluation could build up to an extent that they                                                                       0

significantly reduce demand for dong-denominated assets. In such an                                                                         -5
event, the black market exchange rate would depreciate sharply and                                                                          -10
inflation could return to double digits. The current account deficit would                                                                -15
be wider than projected in this Update because speculative imports would            2005      06      07         08     09       10
surge, as they did in the first half of 2008. The resultant macroeconomic      Sources: Ministry of Finance; State Bank of Viet Nam; staff
turbulence and stabilization measures would likely cause slower economic       estimates.
growth than forecast in the ADO 2009 Update baseline scenario.                 Click here for figure data

    Moving to guard against such an outcome, SBV has started
taking measures to keep inflation in check and to damp devaluation
expectations. In particular, it has committed to limit growth of banking                              Public and publicly guaranteed debt
                                                                               3.10.11 Public and publicly guaranteed debt
system credit and total liquidity (M2) to 30% in 2009; asked state-owned
                                                                                                                                    % of GDP
commercial banks to limit loan growth to 25% in 2009; and urged all                                                                       50
commercial banks to tighten credit for consumer spending and purchases
of real estate and stocks. It has also committed not to devalue its                                                                         40

reference exchange rate in the near future and has increased the supply                                                                     30
of foreign exchange in the formal market. As noted, SBV is also likely to
start tightening monetary policy toward the end of 2009. It is expected to          2005      06       07        08     09        10

pursue moderately tight monetary policy in 2010 to support the dong and                                                  Forecast
to counter inflation pressures stemming from accelerating growth and           Sources: Ministry of Finance of Viet Nam; staff estimates.
                                                                               Click here for figure data
rising world commodity prices.

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